Question

The management of Smith Industries Inc. manufactures gasoline and diesel engines through two production departments, Fabrication and Assembly. Management needs accurate product cost information in order to guide product strategy. Presently, the company uses a single plant wide factory overhead rate for allocating factory overhead to the two products. However, management is considering the multiple production department factory overhead rate method. The following factory overhead was budgeted for Smith:

1	Fabrication Department factory overhead	$455,000.00
2	Assembly Department factory overhead	286,200.00
3	Total	$741,200.00

Direct labor hours were estimated as follows:

Fabrication Department	4,550	hours
Assembly Department	5,400
Total	9,950	hours

In addition, the direct labor hours (dlh) used to produce a unit of each product in each department were determined from engineering records, as follows:

	Required:
Production Departments	Gasoline Engine	Diesel Engine
Fabrication Department	2.9 dlh	2.2 dlh
Assembly Department	2.2	2.9
Direct labor hours per unit	5.1 dlh	5.1 dlh
a.	Determine the per-unit factory overhead allocated to the gasoline and diesel engines under the single plantwide factory overhead rate method, using direct labor hours as the activity base.*
b.	Determine the per-unit factory overhead allocated to the gasoline and diesel engines under the multiple production department factory overhead rate method, using direct labor hours as the activity base for each department.*
c.	(1) Recommend to management a product costing approach, based on your analyses in (a) and (b). (2) Give a reason for your answer.
	*If required, round all per-unit answers to the nearest cent.

Answer 1

Answer -

Input	Fabrication department factory overhead	$ 455,000.00
	Assembly department factory overhead	$ 286,200.00
	Total	$ 741,200.00
	DLH
	Fabrication department	4,550	hours
	Assemby department	5,400
	Total	9,950
	Production Department	Gasoline Engine	Diesel Engne
	Fabrication Department	2.9	2.2
	Assembly Department	2.2	2.9
	Direct labor hours per unit	5.1	5.1
a	Single plantwide overhead rate = Total overhead cost ÷ Total Direct labor hours
	Single plantwide overhead rate = $741,200 ÷ 9,950 = $74.49 per DLH
	Gasoline Engine =	DLH x Overhead Rate
		5.1 x $74.49
		$ 379.9	per unit
	Diesel Engine =	5.1 x $74.49
		$ 379.9	per unit
b	Fabrication department overhead rate =	455,000 ÷ 4550
		100	per dlh
	Assembly department overhead rate =	286200 ÷ 5400
		53	per dlh
	Gasoline Engine:
	Fabrication	2.9 x 100 =	290
	Assembly	2.2 x 53 =	116.6
			$ 406.60	per unit
	Diesel Engine:
	Fabrication	2.2 x 100=	220
	Assembly	2.9 x 53 =	153.7
			$ 373.70	per unit

C)

It is advised to implement multiple production department factory overhead rate method to allocate factory overheads

Both products require direct labor rate hour in total of 5.1 hours each unit to produce one unit both department wise each type of products require different labor hours that is 2.9 dlh and 2.2 dlh

Multiple production department factory overhead method avoids cost distribution by accounting each individual department overhead separately and allocating same on consumption of dlh by each department separately

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